How do family businesses stay intact for the next generation? The statistics are daunting: some 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over.
In an increasingly competitive world, family businesses need quality advice to help maximize their chances of success. But we also need to recognise that family businesses are intrinsically bound up with the personal lives and wealth of its members.
This is where family offices can step in and add value. As a single command centre, family offices can help to keep families unified in purpose through a range of services, from well-considered succession planning, to formulating family constitutions and assemblies, to helping set up family philanthropy.
Family businesses are often the brainchild of one or two founders, sometimes growing organically for another generation or two. But the longer a family business exists, the less it can depend on the sheer force of will of its senior members. Family offices help to bring structure as a business matures.
A family constitution establishing the principles of how the business is to be governed can serve as a useful reference point. This can anchor the family’s values, helping to transmit the principles of the founder to the next generation. Family offices can sit down with a founder, or other senior figures in the business, to help them formulate these principles and commit them to paper.
Boards, assemblies and councils are also important in ensuring that everyone’s voice is heard. Some of these may be organised in accordance with shareholdings, but in a family business it is important to give more junior or peripheral members a seat at the top table as well. Younger family members might even be given a specially-crafted ‘junior board’ to cultivate their interest in the business. Here, family offices can help provide an organisational framework.
Insiders and Outsiders
Some family members want to continue in the business. Others do not. However, it doesn’t need to be quite so binary. Individuals would often like to retain some involvement, but in a specific role which interests them. Again, family offices can come to the rescue and work to fit a family member’s own interests into the company in a way that makes corporate sense.
It may also not make sense to keep everything in the family. Perhaps a professional CEO is needed to run the show while family members sit on the board. Or maybe it’s a matter of hiring a few more in-house experts, such as lawyers or accountants, to offer much-needed support and counsel. An example of a large family company doing this well is the Brenninkmeijer family, of C&A fame. For a smaller firm, these first forays can be contentious – but is equally something which a family office can help to advise on, leveraging its position as a neutral arbiter.
Trusts are an important weapon in the family office arsenal. This is especially because they can help to mediate disputes, which is a crucial component of family business succession planning.
Unfortunately, a lot may have been left unsaid when a founder dies. Family members who put in the hours to grow a business may fear a sibling, who didn’t, gaining a substantial interest in the same company which they feel to be rightly theirs. The task of trustees is to satisfy the wishes of the settler, handling disputes which arise much in the way a referee helps to manage a game of football.
When someone says “family”, people think “local”. But this is hardly the case anymore. One of my clients is a family business from Milan, Italy. It used to be that everything they did was in that locality. Now, the family has production everywhere from Finland to Malaysia.
This sort of globalisation opens up a new set of challenges and opportunities. Family offices can strive to ensure that diversity of jurisdictions works to everyone’s advantage – most notably in keeping things tax-efficient for all family members, and for the business itself. It also prompts some emotionally charged questions over who is closer to the business, or who gets to participate in the company’s exciting new phase of growth, about which families may welcome advice.
For successful family businesses, philanthropy can be the glue which brings people together. Members can get involved in something meaningful together by injecting purpose into their work, offering a line of participation to those who might otherwise not want to be too involved in the business.
Family offices can take the lead on this, identifying the right organisational structure.
This could mean setting up a charity in and of itself, or a grant-making body which interfaces with established charities.
Regardless of what model the family chooses, a family office can cut out the administrative bureaucracy and let family members focus on helping the less fortunate.